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Sunday, 6 April 2014

Nigeria’s GDP Rebasing: Understanding the Basics

Nigeria’s
GDP rebasing exercise started in the fourth quarter of 2011. It was officially
launched in April 6, 2014. It is heartwarming that the
brainchild has finally become a reality. Despite the challenges the exercise
posed, the National Bureau of Statistics was able to pull it off. In the nick
of time, Nigeria’s GDP rebasing has generated more speculations than applause
in the media. Some media alarmists have expressed concern over whether
Nigeria’s GDP rebasing poses a challenge to South Africa, as if the essence of rebasing
Nigeria’s GDP is to make Nigeria the biggest economy in Africa. The media
speculations are tell-all signs of serious lack of understanding of the concept
of GDP and GDP rebasing. The speculations reveal a disconnection in knowledge,
which tends to suggest that a lot of people need a primer on these concepts.

To
start with the basics, GDP rebasing is broadly the process that replaces the
old price structure (or the base year) to compile volume measures of GDP with a
new price structure.
Since 1990, Nigeria has not rebased its GDP. What this means, basically, is
that for 24 years Nigeria has been using a base year that underestimates how
Nigeria’s economy has grown over time. This suggests that Nigeria needs to
update its statistics to reflect accurately the economic activities that have
taken place over time. In this regard, GDP figures are compared to other GDP
figures, using a base year that serves as a point of reference to which future
GDP values are compared. This is the premise on which GDP figures make sense.

Speculators
have begun to create credibility gaps in the minds of gullible Nigerians with
unparalleled analogy of GDP rebasing with poverty reduction, job creation,
inequality gap, and economic development in general. The analogy seems to be
stimulated by the anxiety over whether the rebasing exercise will reduce
poverty, create jobs, bridge inequality gap, and lead to economic development.

To put things
in right contexts, the essence of GDP rebasing, inter alia, is to give the government a better sense of
opportunities to improve economic activities; to see better policy options;
and to reposition for appropriate policy interventions. It is not a must that
GDP will increase or decrease each time it is rebased. Though Nigeria’s GDP
rebasing tends to increase the nominal GDP to around $432bn, rising above South
Africa’s $370.3bn, at the end of 2013; hence making Nigeria the biggest economy
in Africa in terms of nominal GDP, it is misleading to speculate that GDP
rebasing always leads to higher nominal GDP. The increased nominal GDP
resulting from the rebasing exercise does not mean that poverty will be reduced
over night; it does not mean that jobs will be created drastically to reduce
unemployment; it does not mean that inequality gap will disappear overnight; it
does not mean that Nigeria will automatically become a rich country; and it
does not mean economic development. But it is needed as Nigeria’s economy has
become more diversified than before.

GDP
is measured differently from poverty and inequality. GDP growth is
not identical to job creation, and is not the same as economic development. GDP
(which is the total market value of all the final goods and services produced
in Nigeria in a given year) is used to measure economic growth, and can exist
in nominal and real terms- where nominal GDP (which is what makes Nigeria the
number one economy in Africa) is concerned with current prices, and real GDP
(which is more broadly used to account for economic growth as it tells us how
much Nigeria’s economy changes in size and how standard of living changes over
time) is concerned with constant prices (prices from the base year) with some
sort of adjustments in prices.

However,
poverty reduction and closing inequality gap require a more inclusive and
sustainable growth than a mere GDP rebasing. Economic prosperity needs to
be shared across the population for changes in poverty and inequality to be
seen. Jobs are created when growth is diversified. Job creation is premised on
addressing infrastructure and institutional constraints. It requires
strengthening governance and public sector management.

GDP
rebasing is not synonymous with economic development. Thinking
otherwise is misleading. Though Nigeria’s GDP rises above South Africa’s GDP,
it does not suggest that Nigeria will automatically become a more developed
economy than South Africa as some wonky media alarmists have speculated. Also,
GDP growth is not synonymous with economic development. While economic growth,
as measured by GDP growth, is centered on economic progress, economic
development is a broader measure of human progress and transcends what GDP
growth measures to capture social, environmental and other aspects of the
economy not captured by GDP growth. It is not impossible for an economy to grow
in the absence of economic development. With this clear distinction, it is
obvious that though Nigeria could become the biggest economy in Africa in terms
of nominal GDP, South Africa is ahead of Nigeria in terms of economic
development given its infrastructure base, functional institutions, impressive
legal systems, and human development indicators.

Part of the
media speculations is whether rebasing is necessary. In other
words, to what benefit is the rebasing? For policy-making; a policy maker needs
the best information available at a particular point in time to make the best
policies. With the GDP rebasing, policy makers will have at their disposal
accurate set of statistics that paint the latest picture of the economy; hence
enhancing evidence-based policy-making. Policy-making yields better results
when data are correctly collated, understood, and interpreted, and linked with
the identified priority areas that need change. For the government; the global
economy has become increasingly dynamic. This dynamism is reflected in the
changes that take place in economies over time. Since 1990, new technologies
have emerged in Nigeria; new sectors have emerged with new products and
services; and consumer tastes and behaviour have changed. If Nigeria continues
with the old wine in the old wine bottle- without rebasing to capture better
statistics- the newly emerged economic activities would be lost in the wind;
hence economic transformation might become a lost cause. In essence, GDP
rebasing gives a better sense of opportunities to improve economic activities,
and helps the government, policy-makers, analysts and citizens in general to
see better policy options and reposition for appropriate policy interventions.

There
is no gainsaying the fact that Nigeria is a holy grail for foreign investment,
but Nigeria is beleaguered with many challenges, particularly the cancer of
corruption. A mere GDP rebasing will not change
overnight these challenges. I submit that GDP rebasing should be a continuous
exercise to guide better policy decisions as the experience in the USA has
shown. Also, government should address poverty measurement with the same vigor
as the GDP measurement to give a better sense of the rebasing exercise.